Economy

Investors are eyeing what could be a pivotal consumer price index report for April, anticipating that the data shows inflation has already reached its height.
Economists warn that prices could remain elevated. The issue is how fast inflation could decline when it comes to determining how the Federal Reserve will respond with interest rate hikes.
CPI is expected to rise 0.2% in April or 8.1% on an annualized basis. That’s compared with a 1.2% monthly increase or 8.5% gain year-over-year in March.

Shoppers inside a grocery store in San Francisco, California, U.S., on Monday, May 2, 2022. 
David Paul Morris | Bloomberg | Getty Images

April’s consumer price index report is expected to show inflation has already reached a peak — a development that some investors say could temporarily soothe markets.
But economists say, even with a reprieve in headline inflation, core inflation could gain on a monthly basis and stay elevated for months to come. Core inflation excludes food and energy costs.

The CPI report is expected to show headline inflation rose 0.2% in April, or 8.1% year-over-year, according to Dow Jones. That compares with a whopping 1.2% increase in March, or an 8.5% gain year-over-year. The April data is expected at 8:30 a.m. ET Wednesday.
Core CPI is expected to rise 0.4% or 6% year-over-year. That compares with 0.3% in March, or 6.5% on an annualized basis.

Stocks gyrated Tuesday ahead of the much-anticipated data. The S&P 500 ended the day with a 0.25% gain, and the Nasdaq added 0.98%. The Dow Jones Industrial Average lost 84.96 points.
The closely watched benchmark 10-year Treasury yield retreated to about 2.99% Tuesday after a sharp run up to 3.20% Monday. Bond yields — which move opposite price — have been running higher at a rapid pace on expectations of aggressive Federal Reserve interest rate hikes.

“I wouldn’t say tomorrow’s CPI matters by itself. I think the combination of March, tomorrow’s and May’s data will kind of be the big inflection point,” said Ben Jeffery, a fixed income strategist at BMO.

But Jeffery said the report has a good chance of being a market mover, no matter what.
“I think it will either reassert the selling pressure we saw that took 10s to 3.20% … Or I think it will inspire more dip-buying interest for investors who have been waiting for signs that inflation is starting to peak,” he said.

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A potential turning point for stocks

In the stock market, some investors say the data could signal a turning point if April’s inflation comes in as expected or is even weaker.
“I think the market, from a technical standpoint, is very focused on trying to divine how much the Fed is going to move,” said Tony Roth, chief investment officer at Wilmington Trust Investment Advisors.
A hotter report would be a negative since it could mean the Fed will take an even tougher stance on interest rates. Last week, Fed Chair Jerome Powell signaled the central bank could hike rates by 50 basis points, or a half-percent, at each of the next couple of meetings.
The market has been nervous about inflation and that the Fed’s response to it could trigger a recession.
“I don’t think this is the end of the drawdown in the market … The market needs to go down 20% at a minimum. If we get a series of better inflation data, then I think 20% could be the bottom,” Roth said. The S&P 500 is off nearly 17% from its high.
“If the inflation data is not as good as we think it will be, not just this month but consecutive months, then I think the market prices for a recession, and then it’s down 25% to 40%,” said Roth.

Two risks emerge

Roth said there are two potential exogenous risks in inflation data, and either could prove to be a problem for markets. One is the unknowns around the oil and gas supply strains and price shocks caused by Russia’s invasion of Ukraine, and the other is China’s latest Covid-related shutdowns and the impact on supply chains.
“Nobody knows how they’re going to play out … Either one of these could be a bigger problem than the market is anticipating right now,” Roth said.
Aneta Markowska, chief financial economist at Jefferies, said she is expecting a hotter-than-consensus report, with 0.3% gain in headline CPI and a 0.5% jump in core. She thinks the market’s focus is wrong and investors should be concerned more with how much inflation can decline.
“I think a lot of folks are focusing on the year-over-year rate slowing, and I think that helps consumers because it looks like real wages will actually be positive for a change in April on a month-over-month basis,” she said. “But if we get that acceleration in core back to 0.5% that we are projecting, that’s a problem for the Fed. If you annualize that, you’re running at 6%, and that would really mean no slowdown.”
Markowska noted the central bank assumes inflation will slow to 4% this year and 2.5% next year. “The question we have to ask is are we on track to hit that forecast and if not, the Fed could have a bigger policy overshoot than they envisioned,” she said.
The perception is that inflation problems are supply chain-driven, but those issues are going away, Markowska added.
“I think that ship has sailed. We’re past supply chains. This is the services sector. This is the labor market,” she said. “Just because we peak and core goods inflation is coming down, that doesn’t fix the problem. The problem is now everywhere. It’s in services. It’s in the labor market, and that’s not going to go away on its own … We need core inflation to get down to 0.2%, 0.3% month-over-month pace, and we need it to stay there for a while.”
Barclays U.S. economist Pooja Sriram said she does not think investors should get too excited about inflation peaking, since what will matter is how quickly the level comes down.
“For the Fed to be pacified that inflation is coming down, we need to get a really weak core CPI print,” she said. “Headline CPI is going to be hard to come down because the energy component is swinging.”
The energy index was up 11% in March, and it may be less of a contributor to overall inflation in April because gasoline prices fell. Economists say energy will be a bigger issue in May data, since gasoline is rising to record levels again.
Some economists expect used-car prices will come down in April, but Markowska said data she monitors shows increases at the retail level.

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Thanks for reading FirstFT Asia. Here’s the rest of the day’s news — EmilyFive more stories in the news1. Musk says he would reverse Trump’s Twitter ban Elon Musk has said he would reverse Donald Trump’s ban from Twitter, accusing the social media company of leftwing bias that had aggravated political divisions in the US. “I think it was a morally bad decision, and foolish in the extreme,” Musk said. Watch Musk’s interview with FT’s Peter Campbell here.

Elon Musk said Twitter had aggravated political divisions in the US © Em Fitzgerald/FT

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South Korean president Yoon Suk-yeol offered Pyongyang ’an audacious plan that will vastly strengthen North Korea’s economy’ if it committed to denuclearisation in his inauguration address © Getty Images

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Tadao Ando’s ‘subterranean spaceship’ features an egg-shaped structure with an oval atrium © James Hand-Cukierman More

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NEW YORK (Reuters) – In the wake of the 50-basis-point interest rate hike by an increasingly hawkish Federal Reserve, markets have gyrated wildly ahead of this week’s U.S. economic data, which will be closely parsed for signs that inflation is peaking. Price growth has soared to the highest level since the early 1980s due to the collision of a post-pandemic demand boom and a gummed up global supply chain, and has stoked fears that the Fed’s aggressive attempts to rein it in could lead the economy into recession.The Labor Department’s jobs report on Friday provided the first potential sign of a plateau, with monthly wage growth decelerating to 0.3% from 0.5% and holding steady at 5.5% year-on-year.On Wednesday, analysts expect the consumer price index (CPI) to show a sharp pullback in monthly growth, cooling to 0.2% in April from 1.2% in March — the biggest monthly jump in more than 16 years — and an annual increase of 8.1%, 0.4 percentage point lower than the prior 8.5%, which was the hottest reading since December 1981.Energy and food prices were the culprit, exacerbated by fallout from the Russia-Ukraine war.”Russia’s invasion of Ukraine has magnified the pace of inflationary pressures this year and the Fed can’t do much about that,” said David Carter, managing director at Wealthspire Advisors in New York. Energy prices posted an 11% monthly jump in March, with gasoline surging by a jaw-dropping 18.3%. Average prices at the pump hit a record high in March, according to motorist group AAA. Food eaten at home rose 1.5% on a monthly basis, and grocery prices rose by 10% year-on-year, the fastest annual growth in more than four decades. Stripping out food and energy prices, so-called “core” CPI is expected to have edged up by 0.4% last month, but cooling to 6.0% from 6.5% on an annual basis. GRAPHIC: Inflation (https://graphics.reuters.com/USA-STOCKS/akvezykzypr/inflation.png) Any sign of deceleration would be welcomed by markets.”If inflation prints at expectations, it would be the first meaningful decline in the annualized inflation rate since the depths of the COVID recession,” writes Matt Weller, global head of research at StoneX Financial.Thursday’s producer prices (PPI) data, which reflects the prices U.S. companies receive for their goods and services at the figurative factory door, are predicted to tell a similar tale.Consensus estimates forecast a sharp deceleration in headline PPI, and a shallower slowdown when stripped of food and energy items.Recent survey data, particularly from the Institute for Supply Management’s (ISM) purchasing managers’ indexes (PMI) reveal that two main drivers of inflation — supply scarcity and the ongoing worker drought — remained significant headwinds in April.On Tuesday, while 32% of survey participants in the National Federation of Independent Business’ (NFIB) Business Optimism survey rated inflation their top concern — a record-high reading — fewer respondents reported raising prices and hiking wages. GRAPHIC: Inflation worries and prices paid (https://graphics.reuters.com/USA-STOCKS/zgpomlgmypd/nfibism.png) So far, many companies have been able to pass input costs along to their customers. In fact, the S&P 500 12-month forward profit margin is increasing.As of May 6, that figure was 13.4%, higher than the early May readings going back at least 12 years, according to Refinitiv Datastream. “Corporations have been able to pass on higher costs as demand remains strong,” Carter added. “However, if the Fed’s interest rate increases cool demand, companies will be unable to pass along higher costs and margins will shrink.”How will the markets react to the data?The S&P 500 slipped 0.3% on April 12, when March’s dire — although largely expected — CPI report was released. Any number at or below consensus on Wednesday would likely be welcomed by investors.”Under the hood, there continue to be signs that inflation, labor market tightness, and supply chain woes may all have peaked,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. “The market is in ‘prove it’ mode, and those early signs are still far from adequate proof to calm the markets.”(This story refiles to add graphics) More

DUBLIN (Reuters) – Lessors with hundreds of jets stuck in Russia are preparing for what one said would be a “vigorous” pursuit of insurance claims while maintaining discreet contact with some customers after Moscow blocked the jets from leaving.The loss of over 400 leased planes worth almost $10 billion since Western countries sanctioned Russia has led to a string of lessors writing down hundreds of millions of dollars in recent weeks. But the lessors, speaking at a major industry conference in Dublin, said they may have to wait years to find out how much they will secure from unpredictable battles with insurers. In the meantime they face much higher insurance bills. “Practically speaking, I don’t think anyone’s expecting to get their planes back anytime soon … mentally we’re moving past it,” said the head of U.S. lessor Aircastle, which has booked $252 million in impairment charges.”That doesn’t mean our teams aren’t still working and chasing, preparing for what we expect to be contested discussions with our insurance carriers,” CEO Michael Inglese told the Airline Economics conference.Steven Udvar-Hazy, founder of Air Lease (NYSE:AL) Corp, which has booked an impairment of $802.4 million, said it was pursuing “vigorous” insurance claims.The largest claim has been made by AerCap, the world’s biggest aircraft lessor, which has submitted a $3.5 billion insurance claim for more than 100 jets.Chief Executive Aengus Kelly acknowledged his firm was on the “wrong side” of the default, with the industry’s largest Russia exposure, but said “the insurance companies will have to settle” at some point as he shrugged off higher premiums.”Costs are going to go up, but I’m not going to listen to what the insurance companies are saying because they’re going to face competition themselves at some point,” he said. The head of Ireland’s Genesis, Karl Griffin, said it was one of the first lessors to renew insurance after Western sanctions halted all Russian leases – adding it was “not a pretty sight.”Few can say how the looming battle between lessors and insurers will play out. S&P Global (NYSE:SPGI) has forecast a huge range of aviation insurance losses of $6-15 billion.”No one knows exactly where it will land,” said Niels Jensen, co-head of aviation finance at Vinson & Elkins law firm, who said it will come down to the specific policy wording.Lawyers say the most heated issue involves the number of “occurrences” or trigger events involved in Russia’s default. That judgment could sway the value of settlements dramatically.In London, multiple leading law firms have been lined up to do battle over the implications of that single, sparse term.Dubai-based lessor DAE Capital, which described its $538 million write-off as “manageable”, said it expected to collect on insurance. “It will just takes time,” Chief Executive Firoz Tarapore told the conference. ‘WE DIDN’T STEAL’Even as many write off assets and pursue claims, a number of lessors said they were keeping some contact with private Russian airlines, which have in recent years relied heavily on Western lessors and have been good at paying bills.All said they were adhering strictly to sanctions.”We’re all pursuing the same strategy, making insurance claims, talking to the airlines, private airlines… but there is not much they are allowed to do,” said Dan Coulcher, Chief Commercial Officer of Willis Lease Finance, which on Monday took a $20.4 million impairment on two engines left in Russia. The Russian airlines who leased the planes were a lucrative market before the invasion. Lessors say the carriers want to avoid closing the door completely to future business, but are under heavy pressure from Moscow to cut ties. Russian President Vladimir Putin has said lessors from “unfriendly countries” violated their contractual obligations.”We have many of them basically tell us on the phone: ‘look we’re not crooks. We didn’t steal your airplanes. We hope you get paid for your airplanes, but we’re both stuck’,” said John Plueger, chief executive of Air Lease Corp .Some airline officials have shied away from cellphones, with some adopting ‘burner’ phones or meeting away from base.”Obviously their concern (is) we don’t know who’s listening. And that fear … escalated as the crisis went” on, Plueger said. Dialogue continues but is “much more guarded” he added.Russia makes up a modest 4% of global traffic but experts worry the claims battle could sour attitude to risk in general.”I think the bigger thing is could we see the same thing happening in a much, much bigger country starting with a ‘C’ in Asia,” said Marc Iarchy, a partner at World Star Aviation.”It will be a much bigger shock to the system. But it’s entirely possible,” he warned. More

AMELIA ISLAND, Fla. (Reuters) – If the Federal Reserve sells any of its holdings of mortgage backed securities it may have to do so at a loss, Cleveland Federal Reserve bank President Loretta Mester said Tuesday, a potentially difficult problem for the central bank, at least politically, since it remits its annual profits to the U.S. Treasury.”A potential drawback of sales is that, depending on the interest rate path, they could result in realized market-to-market losses,” Mester said in comments to an Atlanta Fed conference. “Such losses would not entail any operational challenges for the Fed in setting monetary policy. However, they would pose communication challenges that would need to be appropriately addressed.” The Fed has faced persistent questions from some members of Congress on the risks it was taking in amassing its giant stockpile of bonds and mortgage securities. The assets were purchased to stabilizing key financial markets during the onset of the pandemic in 2020, but part of the Fed’s current fight against inflation involves lowering its presence in those same markets.Assets that are held to maturity pose no risk of loss, but sales would depend on the market prices and interest rates of the day.An ICE (NYSE:ICE) index of mortgage backed securities is down about 9% on the year.Mester’s comments do not reflect the likelihood of sales. But Fed officials do want their balance sheet to consist mainly of Treasury securities, and to get rid of most if not all of the $2.7 trillion in mortgage securities the central bank currently holds.Fed officials plan to begin reducing their nearly $9 trillion balance sheet next month initially by taking the proceeds of maturing Treasury Securities or repaid mortgage securities and, instead of reinvesting the proceeds, pulling that much cash out of the financial system. By this fall the reductions will be as much as $60 billion per month for Treasury securities, a limit the Fed expects to meet each month, and as much as $30 billion in mortgage securities.Because of the slower repayments expected on home mortgages, the Fed does not expect to meet that cap each month, and has mentioned possible active sales of MBS to reach it. Sales of MBS would “speed the return or our portfolio’s composition” to mostly Treasury issued securities.Because home mortgage interest rates have been rising, the sale price of those mortgage securities may well have fallen since buyers would demand a discount to accept mortgages based on a smaller stream of payments.That “would lower the Fed’s remittances to the Treasury,” Mester said.She said that in determining how far the balance sheet will shrink the Fed, as it did in a similar exercise from 2017 to 2019, will “be monitoring developments in money markets to determine the appropriate level.” More

AMELIA ISLAND, Fla. (Reuters) – Inflation will need to show a “compelling” slowdown before the Federal Reserve can consider pausing its interest rate increases, Cleveland Federal Reserve President Loretta Mester said Tuesday, with the risks currently pointed towards a tougher fight to bring the pace of price increases under control.”I would need to see monthly numbers coming down in a compelling way before I would want to conclude we could now rest,” Mester said in an interview with Reuters on the sidelines of an Atlanta Federal Reserve bank conference.Between the Ukraine war, continued coronavirus lockdowns in China, and other factors “the risks to inflation are skewed to the upside and the cost of allowing that inflation to continue is high,” Mester said, an argument for the Fed “doing more upfront rather than waiting.”The Fed is expected to approve half point increases to its short-term policy rate in June and July, “then we have to see,” how inflation is behaving and debate how much higher rates may have to move, Mester said.New government data on Wednesday is expected to show consumer prices continued rising more than 8% on a year over year basis last month, but may have slowed a bit compared to March – a possible sign that inflation has hit a peak. Fed policymakers have set a 2% inflation target using a separate measure that is running about three times the target level. They began raising interest rates in March to try to cool consumer spending and bring the demand for goods and services more closely into line with what a stretched economy can produce.Mester’s comments point to a debate still to come over how different policymakers will evaluate incoming data, how much progress they will need to see on inflation to slow or pause further rate increases, and how much of a slowdown in the rest of the economy may be needed to cool the strongest price increases in 40 years.Other Fed officials this week cautioned that demand could fall off fast as interest rates rise, a reason to be careful in raising rates.Mester said she was open to the possibility that “excess demand” falls off faster than expected, or that world supply chains improve more quickly. But at this point she said she expects the Fed’s policy rate will have to move beyond the 2.5% level she regards as “neutral,” and to a level that would begin to restrict the economy and likely cause the unemployment rate to rise from the current low level of 3.6%.Even then, she said, she did not expect the Fed to fully win its fight over inflation this year or next, only to get back on the right path.”I don’t think it will get back to 2% next year. But it will be well on its way, in the range of two and half percent but moving in the right direction,” she said. “And given where the economy is and all the factors affecting inflation that are outside of our realm, that is acceptable to me.” More